Markets in a holding pattern | FOMC awaits

The FOMC standard of late is to see markets remain in holding patterns up until the meeting, spike in both directions at hike delivery, then remain pegged to the open price until the press conference begins. If the fed is serious about convincing markets of three (or more) hikes this year, then they could surprise with a livelier statement than usual which leaves another hike open in H1.

We believe it is more likely they could upgrade their staff forecasts for 2017, which allows them to justify further hikes in the coming months without promising too much. A simple hike, bland statement and similar forecasts runs the risk of disappointment, a weaker Dollar and general reversal of the moves seen in recent session.

With markets still only price in two hikes this year, any upgrades to the Core PCE inflation or signals of another live meeting should revive the Greenback rally, which has remains subdued compared to the bond market moves of late.

It would take a particularly hawkish hike for AUD to remain under pressure and stay beneath 75c. Domestically things are balanced and Iron ore remains on fire, although tomorrow’s employment could unhinge this if it is unexpectedly weak. A single hike would reduce the yield differential yet AUD remain at a premium. So, traders need to be convinced of additional hikes in subsequent meetings for AUD to roll over spectacularly. A dovish hike should send AUD comfortably above 76c although we remain ambivalent 0.765.

Matt Simpson – Senior Market Analyst

© Scoop Media